Trading Strategy for Beginners in 2021

The BSE Sensex, India’s benchmark index, touched a record high of 53,000 on June 23rd, 2021  on the back of optimistic investor sentiment on India’s growing economy. As a result, a large number of Indians are now increasingly thinking of trading in stocks, moving away from generations of conservative investing attitudes that saw them park their savings in low yielding, traditional  assets such as FDs, bonds, and real estate.

According to data from India’s central depositories, 2020 alone saw the addition of 10.4 million new investor accounts. Angel Broking, one of the largest broking firms in India has reported that nearly 72% of its new customers since 2020 are first time investors in the stock market. Clearly then, a lot of beginner traders are beginning to trade in 2021 and are bullish about stocks. However, such optimism is best taken with a word of caution, as despite their promising returns, stocks can also be a risky investment and investors risk losing all their capital if a trade goes wrong. This is why it is best to devise a good strategy before you begin trading.  Here are  a few trading strategies for beginners that help them navigate the choppy waters of equities trading.

1. Open a Trading Account With a Reliable Broker

This one might seem like an obvious thing to do, but often the most effective advice is about the simplest of things. Your broker is the intermediary between you and the stock exchange, enabling you to access the markets and place your trades. Therefore, your broker is the single most important entity in the long chain that connects a buyer and a seller of shares in a market. With the advent of dematerialized trading and demat accounts, having an account with a reliable broker that provides you with a good trading platform becomes even more important. This is because with online trading, buying and selling happens with the click of a button, and not having a sophisticated, glitch-free  trading platform capable of executing trades in real time can render even the best trading strategy ineffective.

2. Learn the Fundamentals of Stock Trading

Online trading and demat accounts have made investing in the markets accessible to all with just a matter of a few clicks. However, just because buying or selling a stock is simple does not mean that trading is too. There is a reason there exist armies of professional fund managers and stock traders who specialize in stock trading.. Trading is complex, risky, and requires patience and a steep learning to master. For many, it is a journey of life-long learning. However, this does not mean that the average investor cannot learn the art of stock market trading. In fact, many of the best traders and investors are self-taught. It does however, require patience to learn. A really good place to start for beginners for share market is by reading some classics of stock market investing such as :

• The Intelligent Investor by Benjamin Graham. ( this was a book that heavily influenced Warren Buffet when he first started investing)
• The Nature of Risk by Justin Mamus.
• A Random Walk Down Wall Street by Burton Malkiel.

Once you’ve learned the basics, you can build on that knowledge to learn how to apply the fundamentals to everyday trading scenarios. For this, you should consider investing time in good online courses and financial educational content designed to bring you up to date with real-time market action.

3. Learn Technical Analysis

Fundamental analysis and technical analysis are two broad approaches to investing in the markets, and each has its proponents and die-hard advocates. However, the complete investor is the one who is proficient at both and makes a trading decision only after analyzing a strategy through both the lenses. Whereas fundamental analysis is concerned more with the intrinsic value of stocks and the larger macroeconomic scenario, technical analysis has a shorter-term horizon and focuses on discerning patterns and price and volume movements  on stock market charts. There are various technical analysis strategies and most of them rely on making use of a combination of technical indicators to predict price movement. Since technical analysis is dynamic and constantly evolving, it is not of much use to learn it through old and outdated literature that uses decades old price data. It is best learned through new-age online courses that help you see in real time how charting patterns and technical indicators can be used to predict price movements. For this reason, it is good to learn technical analysis from an online learning platform such as smartmoney by Angel One that is not only comprehensive, but also a free learning resource.

4. Devise a Trading Strategy

The markets are ruthless. If you try to enter the market without a strategy in place, you are sure to lose money. You would have better chances making money buying a lottery than trying to get lucky with stocks. What is a trading strategy?  A trading strategy is not a complex algorithm that only financial wizards at Wall Street can devise. It is simply a plan that details your entry and exit points along with your stop loss, all planned according to some trading logic based on fundamental or technical indicators. That’s it, it’s that simple. Anyone who has followed the previous 3 steps meticulously can come up with a trading strategy. Remember, it is not necessary to have a complex trading strategy to be successful. Often the simplest of strategies are the most effective. However, it is necessary to have a strategy to be successful.

5. Paper Trade

This is  the step that beginner traders most often overlook. Having assiduously put in the effort to go through the first 4 points, they are in a hurry to jump into the action and make their fortune. However, one of the most important skills required to succeed in trading is patience and mental strength. Trading psychology is a complete sub-discipline in itself that the most successful traders spend years in mastering. Putting in the time to paper trade is one of the most important aspects of your financial education. You’ve selected the best broker, read up everything on fundamental and technical analysis and designed an unbeatable trading strategy. Now you must test that strategy over and over again on paper until you are sure that it works. For this purpose, you can open a dummy trading account with any of the leading brokers where you can get a feel of all the live action without putting your real capital at risk. Remember, if your trading strategy doesn’t make any paper money, it will most definitely not make any real money either. It’s as simple as that.

To Sum Up

There has never been a better time to invest in the stock markets, and millions of Indians are taking the plunge as beginner traders. However, investing in stocks comes with risks attached and it is important to educate and train yourself before you risk your hard-earned money. It is recommended that you use a free and comprehensive online learning resource such as smartmoney by Angel Broking to learn about fundamental and technical analysis. Always get enough practice paper trading before trying your trading strategy on a live platform.

Happy trading!

FAQs

Do I need a demat account for trading?

Yes. Demat or online trading now accounts for the bulk of trading activity in the Indian stock markets. Although legacy, paper-based traders still exist, they are now fast being replaced by online trading platforms.

Is online trading safe? I am worried about my holdings getting stolen?

Demat accounts are much safer than paper based trading as there is no risk of your holdings getting lost, defaced, or forged. Make sure you follow the protocols of internet hygiene as explained by your broker.

What is the best trading strategy for beginners?

There is no silver bullet or one-size-fits-all strategy for beginners. There is a learning curve involved in trading that all beginners must go through. However, you can shorten the time spent learning about trading by making use of a good online learning resource such as smartoney that has been designed by industry veterans keeping in mind the needs of the online learner.